Robbins & Myers F3Q08 (Qtr End 5/31/08) Earnings Call Transcript

Robbins & Myers, Inc. (RBN)

F3Q08 Earnings Call

June 30, 2008 11:00 am ET

Executives

Peter C. Wallace - President, Chief Executive Officer, Director

Christopher M. Hix - Chief Financial Officer, Vice President

Analysts

Kevin Maczka - BB&T Capital Markets

Mike Schneider - Robert W. Baird

John Franzreb - Sidoti & Company

Ned Armstrong - FBR Capital Markets

Jeff Hammond - KeyBanc Capital Markets

Alan Mitrani - Sylvan Lake Asset Management

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Robbins & Myers earnings conference call. My name is Sylvana. It will be my pleasure to assist you today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Peter Wallace, President and Chief Executive Officer of Robbins & Myers. You may proceed, sir.

Peter C. Wallace

Thank you and good morning. Once again, I am Peter Wallace, President and CEO of Robbins & Myers. Chris Hix, our Chief Financial Officer, is joining me for the call this morning. I am pleased to take this opportunity to provide an update on our most recent fiscal quarter, discuss the business environment in our key markets, review changes in our business, and then address your specific questions.

I would like to bring your attention to the precautionary slide, slide 1 of the presentation, now familiar to most of you. We are providing this update under Safe Harbor. Some comments may be forward-looking statements and actual events and results may differ from those described in this presentation due to significant changes in capital expenditures in our primary markets. We also refer to various non-GAAP measures, such as EPS or EBITDA excluding special items, as we feel they are helpful to investors in assessing our ongoing performance.

If you are following the presentation on the web, please advance to slide 2. As you will see from our earnings release issued earlier today, we had a really great quarter. We will discuss some of the specific drivers of our performance during this update. From my perspective, it was great to see strong results in a number of areas, including orders, sales, backlog, earnings per share and cash flow.

Orders were up in the quarter, driven by strength in the fluid management group and favorable exchange rates in both process solutions group and Romaco. Sales improved in the quarter as we were able to take advantage of high backlog levels that continue to support both sales and profit growth for the remainder of the year. As in prior years, we are expecting sales to continue ramping up throughout the balance of the year.

I am pleased to report that operating margins have improved in all three of our platform businesses, with improvements driven by higher volume and operating improvements. The finance team has worked hard to manage working capital and the results are really coming through. As you will see in a few minutes, we are generating a lot of cash and our balance sheet allows us to consider various ways to increase shareholder value.

Our primary end markets, including energy, chemical, and pharma, make up 80% of our sales. During our last update, I mentioned there was some rotation taking place in the international markets for our energy business and some of our customers were adjusting orders to better manage their inventory levels. It was great to see orders come in strong this quarter, reflecting continued investment in our niche areas serving the energy market.

Both process solutions and Romaco tend to be a bit lumpy with their orders throughout the year. You may recall a very high order rate in both these segments last quarter. Orders in this quarter were up on a year-over-year basis but the increase was driven in large part by foreign currency, as the Euro has strengthened. These business units serve chemical and pharma markets, which have benefited from a number of larger projects throughout the year, resulting in higher backlog levels that support sales growth in the final quarter of our fiscal year.

We have also introduced some newer products this year, which allow us to build on our leadership position in various markets and regions.

Those of you that have followed the development of Robbins & Myers over the last few years understand that we are methodically building the company’s capabilities to better serve customers, and in doing so we expect to build a great business that properly rewards our investors.

We began the lean journey a couple of years ago but now have an employee base that is embracing the concepts of lean. This is a critical part of our business model. We are continuing to eliminate non-value activities throughout the enterprise. This drives a reduction in lead times, lower cost, and a better work environment as employees take more ownership in their daily activities.

While we have a long way to go with the lean journey, we are now taking more time to build our capabilities to properly interface with customers. Some of the initiatives include key account management training, selling skills development, and improving after market sales support. During this last quarter, we launched our first leadership development program, a program we conduct in concert with a leading university to reinforce the key messages of our company as we develop our future senior managers.

As you can see on slide 3, orders in the third quarter of fiscal 2008 were up 10% over the prior year, with organic growth of 2%. Our definition of organic growth excludes disposals, acquisitions, and foreign currency movement. Our end markets have remained strong throughout the year.

Sales in the third quarter of fiscal 2008 were up 17% over the prior year, or 9% excluding disposals, acquisitions, and foreign currency. With orders slightly higher than sales, we once again had an increase in backlog levels. Backlog levels are now $56 million higher than the third quarter of last year. The backlog provides confidence that we will finish the year strong as we enter our final quarter of the fiscal year.

As we move to slide four, you will see that we have continued to improve our EBIT margin. The fiscal third quarter adjusted EBIT was 17.2%, up 350 basis points from the third quarter of last year. Note that our adjusted EBIT excludes the gain in this quarter from the release of an escrow associated with business units sold in March of 2006. Chris Hix will provide details in a few minutes.

Operating leverage for the company remained high in this most recent quarter, with 37% of the incremental sales flowing through to profit.

Diluted earnings per share in the third quarter improved from $0.39 to $0.76 on a year-over-year basis, for a 95% improvement. Note that 2007 numbers have been adjusted for the two-for-one stock split that took place in February.

The 76% share in this most recent quarter includes a $0.14 benefit due to the escrow release mentioned earlier. Without this gain, we would have had $0.62 per share, or a 59% improvement from 2007 to fiscal 2008.

And cash flow improved $3 million from the prior year period, due to improved profitability. We have done a much better job bringing in cash throughout the year. In prior years, we had a very high percentage of the annual cash delivered in the final quarter and we have been able to improve collections and cash management throughout this fiscal year.

Slide five highlights the improvements to the business. Throughout the last few years, we have steadily moved forward, with year-on-year improvements driving EBITDA upwards. Trailing four quarters of adjusted EBITDA are now at $132 million. The third quarter adjusted EBITDA of $38 million was up 41% from the prior year period.

As you can see on slide six, orders for the fluid management group rebounded in the fiscal third quarter, up 17% over our fiscal second quarter with very little impact from exchange rates. On a year-over-year basis, orders in the fiscal third quarter were up 16%, including about four points of growth from exchange rates.

During our last update, I mentioned there was some rotation taking place with our international customers. While we had lost a significant portion of business after one of our international accounts in the energy sector, which was noted in the second quarter, we were able to fill our order books with new business from other customers in this industry.

As we have mentioned throughout the year, demand for our energy related products remains strong. The industrial pump business also remains healthy, with chemical and waste water markets continuing to hold up well.

Sales have been steadily increasing, due in large part to very strong orders throughout 2007 and the earlier part of fiscal 2008. On a sequential basis, sales were up 9% in our fiscal third quarter, with most of the growth organic.

On a year-over-year basis, sales were up 12% in the third quarter, with about three points coming from exchange rates.

Earlier in the year, we had some shipment delays due to implementation of a new ERP system at our industrial pump business units. Most of the transition issues are now behind us and this has helped to improve shipments. Orders and sales are both benefiting from our sales activities and in particular, the focus on key account management. We have earned some new business and have increased market share at several of our targeted accounts.

Backlog grew to $54 million in the quarter, providing confidence that sales will continue to be strong in the fiscal fourth quarter. EBIT improved once again in this latest quarter, up 250 basis points from the prior year period to 30.2%. The group has done a great job managing assets so that sales can growth with minimal fixed investment. In addition, we had a good product mix in the quarter. The combination of higher volume, asset management, and a favorable product mix were major factors behind the record operating profit. The flow-through profit on incremental sales over the prior year third quarter was over 50%.

With the sales growth we’ve experienced over the last couple of years, we are not at the point where new equipment has to be brought online. Earlier in the year, we placed orders for some strategic equipment and will take deliveries for some equipment in this next quarter. Additional equipment will also come online in fiscal 2009 so that we can keep up with customer demand.

Moving to slide seven, you will see that sales for the fluid management group have grown steadily over the last few years. The group’s structure that was established a couple of years ago has been a key enabler to improving profitability, as we now share resources across a large group of business units to reduce cost. The acceptance of lean continues to improve and all of the business sites are actively working on programs to improve throughput as we reduce cost.

The new product team has embraced the staged gate approach to product development, assuring that we have successful product launches in both energy and industrial markets. This approach assures that engineering, manufacturing, and sales all sign off on product concepts, costs, and commercial aspects before investments are made, and that regular checks are made along the way to assure that we have a viable concept and a successful product launch.

New customer service locations have been added, primarily in international markets, so that we can better serve our customers in remote regions. This approach has worked well, as we generally have support from key customers in the various regions before investments are made. And our key account management program is working for us, with key accounts now working in partnership with us to jointly address market opportunities.

Our focus at fluid management group is to continue making strategic investments to grow the top line and work with lean and other tools to maintain the high levels of operating profit. We are purposefully making investments in the business to provide sales growth in the future.

We expect another strong fourth quarter in our fluid management group. Expect that the product mix may not be quite as favorable as in this most recent quarter, so operating profit margin may come down from record levels seen in this third quarter.

Moving on to slide eight, we can see some of the highlights for the process solutions group. Orders were up in the fiscal third quarter on a year-over-year basis, with a major part of the increase coming from exchange rates. On an organic basis, orders were down slightly from the prior year third quarter. Orders in this group had been very strong earlier in the year and on a year-to-date basis, orders are up 20% over fiscal 2007, with about eight points of the growth attributed to exchange rates. This business will see some large project activity, so the orders and sales can tend to be a bit lumpy.

Sales jumped up 22% over the prior year third quarter, with 12% of this growth organic. We have made some strategic investments in capital to lay out the facility so that we can better manage the material flow through the shop floor, always trying to move toward a single piece flow concept.

Our team is working with a consultant to help implement lean initiatives and there appear to be numerous opportunities to further improve our efficiency and reduce lead times to customers.

Operating profit has improved a lot, with our third quarter EBIT margin up 470 basis points from the prior year to 12.6%. This is attributed to higher volume, along with better functional disciplines in many areas of the business. Flow through profit on incremental sales over the prior year was 34%.

During this year, we had more success with cross-selling campaigns, where we take the complete process solutions group product offering to existing customers. As a result, we have been able to leverage a strong relationship that we have with existing reactor systems customers to help us sell industrial mixers, and vice versa. We are also managing our pricing in a better way, with more control over discounts as we bring the business units together in a more cohesive manner.

Earlier in the year, we installed a new ERP system at our location in the U.K. and in the final stages of this quarter, we installed the same ERP system at our site in Germany. As we experienced earlier with a similar installation at the fluid management group industrial pump sites, we did encounter some disruption during the cut-over. Our process solutions team is managing the transition and has committed to do what is necessary to keep shipments up so as to meet customer requirements.

During the year, we had a number of successes with projects in Asia, although many of the orders were placed with our western business locations. We expect Asia to continue to be a key region for this group going forward.

The chemical markets have continued to be strong. We’ve had some gains with our engineered equipment used in distillation processes to recycle motor oil, and separate fluids in various processes, such as bio-diesel. We continue to see major project activity in Asia, sometimes with engineering and purchasing taking the lead in the U.S. or Europe, but there’s nonetheless a shift in regional activity for a large part of this group. As a result, we need to continue improving our capabilities in China and other major markets.

Sequentially, the orders for process solutions group were down 10% from the second quarter to the third quarter in this fiscal year. While we believe this can be explained by large projects being entered earlier in the year, this is something that we will monitor going forward. Along these lines, we also monitor our quotation activity.

There have been fewer large projects identified in Asia versus a year ago, but the landscape can change quickly. We will continue to monitor the quotation activity to determine if there are changes in capital spending that will have an impact on our business. Competition is also putting additional price pressure on larger projects in Europe, something that we will monitor as we determine the best way to respond.

Moving on to slide nine, you will see the improvements made in the adjusted EBIT margins for process solutions group. We began the restructuring program in 2005, when EBIT was at the low-single-digit level. Restructuring programs allowed us to eliminate some excess capacity in the group and allowed the team to coordinate sales, manufacturing, engineering, and other functions in a way to improve profitability. We have benefited from healthy end markets and in particular, a strong demand from our customers in the fine chemical market.

In order to be successful in this business, you need to sweat the details and this means aggressively managing both cost and selling price. A good portion of our cost comes from commodities such as steel, and with the inflation coming into the market, we have to make sure that we cover higher steel costs with higher selling prices. This is something the team is doing better and they are better at managing the large projects to make sure estimated profit is delivered at the time of shipment.

This group will continue to benefit from the adoption of lean. We’ve engaged an outside consultant to help us in our efforts, and we have taken advantage of training programs supported by some of our local communities.

While I mentioned that our fluid management group is focused on growing the top line and maintaining high levels of profitability, the process solutions group is focused more on improving profitability and plant efficiency. As we continue to implement lean and reduce lead times, we should be able to increase market share by becoming a more responsive organization.

Turning to slide 10, you will see that orders at Romaco were up 3%, but the growth was all from foreign exchange rates. Excluding the impact of currency, orders were down 15%. As with process solutions group, the orders and sales at Romaco can tend to be lumpy in nature. Last quarter, organic sales for this group were up 26%.

Sales were up 20% in the fiscal third quarter on a year-over-year comparison, or 3% excluding the impact of currency exchange rates. While the orders and sales can jump around a bit, we are feeling much better about future prospects. The indications from our primary customers, including contract packagers and multi-nationals in the pharma sector, are quite good. We continue to have success with our latest machine offering for packaging cartons and we are seeing more customers take an integrated solution that incorporates our blister packaging machines with the carton packaging units.

During the quarter, Romaco exhibited at InterPAC, an international exhibition held in Düsseldorf. We had the opportunity to meet with many of our existing customers, as well as prospective customers. The reaction to some of our new product offerings, including a new sterile processing line of equipment for liquid vials in the pharma sector, was very positive. We have already had inquiries and are developing proposals for some of these new offerings.

Adjusted EBIT in the fiscal third quarter improved 39% on a year-over-year basis, up to 6%. With backlog up over $13 million from a year ago, we should experience a sales increase once again in the final quarter of this year. With higher volume and an improved cost structure with our new business model, we expect a sequential improvement in operating profit as we move into the final quarter of this fiscal year. The new business model has a more streamlines sales organization that incorporates agents to a greater degree, and focuses more on engineering solutions while we outsource non-critical production items. We want to be known as the supplier that can design unique solutions for drug delivery.

During the year, we have had success with new offerings for equipment used in the production of disposable syringes, diagnostic strips, and other packaging concepts for oral drug delivery.

During the quarter, we had a non-operating gain of $5.7 million. This was tied to the expiration of contingency obligations related to the sale of two product lines in March of 2006.

Turning to slide 11, you can graphically see the improvements made in profitability at Romaco. The second half of fiscal 2007 was the turnaround point for Romaco, with the group having a strong finish and clearly moving into profitable territory. The group has not looked back, continuing to demonstrate profitability each quarter since that time. The improvement is the result of a less complex business structure which allows the team to focus on a narrower product offering that presents value to our customers.

During the past couple of years, we have made some nice additions to the top management team, resulting in better disciplines across the various functions. We are also spending more time with customers and focused on designing better products. Our latest offerings have had a strong reception in the served markets, comprised to a large extent by packagers in the pharma sector.

Simply stated, we now have better products that customers want to buy and the markets are improving. Romaco continues to improve its position and should continue to contribute more to the ongoing success of Robbins & Myers.

Now moving on to slide 12 in the presentation, you will see that our objectives remain unchanged. This year we have begun the transition to become a more market-focused and customer led organization. We are using key account management training programs as a tool to work closer with those customers that can make a significant difference in our future. As we do this, we will also build capabilities around the sales and marketing functions, including basics around selling benefits to customers, pricing management, and negotiating skills.

Asia remains a key to our future success. We will continue to invest in ways to maximize profitable sales growth in the Asian markets. We’ve continued to invest in our management team so that we have a strong foundation for future growth initiatives.

We will continue to build on our operational expertise, implementing lean throughout the organization as we simplify the business. Recent ERP implementations will be a key enabler to simplify our business, allowing us to share information across the business group. And the new programs provide a level of risk management as we upgrade to supported business systems.

During the quarter, we launched a new training program in conjunction with a major university. This program will allow us to prepare employees to take on more responsibility and larger roles as we continue to grow the company. We have a lot of positive momentum and we have continued to build our capabilities with strategic investments in both equipment and personnel.

Moving on to slide 13, you will note that the end markets continue to work in our favor. With orders and backlog improving in the quarter, we are raising our guidance for the fiscal year. The full year guidance has now been increased from $1.93 to $2.03 to a new range of $2.26 to $2.31. The Q4 guidance is now $0.62 to $0.67 per share, an increase of between 13% and 22% over the fourth quarter of fiscal 2007. We are set to have another record year at Robbins & Myers.

Just moving on to slide 14 with a few summary comments, we continue to see strength in our served markets and in particular, the energy segment. Orders and backlog support a strong year-end finish to the fiscal year and the improved cost structure should allow us to convert higher sales into profit and cash. We have continued to make the necessary investments in our business, assuring capacity is in place that we can properly serve customers. Lean will continue to produce results with a major focus on lead time reduction, and our balance sheet supports strategic growth, either organic or through acquisition. The Robbins & Myers team is dedicated to creating shareholder value.

At this time, I would like to turn the presentation over to Chris Hix and ask that he take you through some of the financial highlights. Following these comments, we will open the phone lines for your specific questions.

Christopher M. Hix

Well, thank you, Pete. Before I start my prepared remarks, let me note that our 10-Q will be filed later today. Please turn to slide 16. Earlier this year, we launched an initiative to better identify and focus on our gross margin performance drivers. Although we still have significant work ahead of us, our businesses are already improving business disciplines for customer pricing, contract terms, and project execution, as well as sharpening our analytics around production and sourcing variances. These improved disciplines, in conjunction with lean and other continuous improvement projects, help us to better capture the profit opportunities arising from higher sales levels.

In this year’s third quarter, gross margins increased from 35.8% to 38.2%, reflecting some success from our efforts, as well as a favorable product mix within our fluid management group.

We leveraged our increased gross margins into 17.2% operating margins, or adjusted EBIT margins, as we have historically called them. As a reminder, our adjusted EBIT excludes special items, which included a $5.7 million gain in the third quarter of 2008 and $400,000 of restructuring costs in last year’s third quarter. The $5.7 million gain resulted from the expiration of these contingencies that Pete related to, which came from the sale of two Romaco product lines in March of 2006. Including this one-time gain in the current year third quarter, the third quarter effective tax rate dipped to 32% and we achieved $0.76 of diluted earnings per share. Excluding this gain, our effective tax rate was 35% and we earned $0.62, so the one-time gain was $0.14 versus the $0.11 that was expected when we announced it in April. The increase from $0.11 to $0.14 was primarily due to finalizing the tax effects from the transaction.

On slide 17, you can see a brief summary of our diluted earnings per share performance this year. The second and third quarters both included gains from the sale of assets and for the full year, we have earned about $0.16 from asset sales and $1.48 from operations.

As we continue to improve our operations over time, we may have additional opportunities to reduce our footprint, simplify our operations, and increase our productivity.

Moving to slide 18, you will note that we again made progress on working capital efficiency. We ended this year’s third quarter with $294 million of current assets, excluding cash, and we also ended the quarter with $194 million of current liabilities, excluding debt. So we ended the quarter with about $100 million of networking capital, similar to last year’s figure. However, this equal amount of investment is supporting higher sales activity and so our networking capital as a function of sales decreased from 14.5% to 12.4%. We made these strides largely from improved accounts receivable performance, an area with further opportunities.

Our working capital progress helped to drive favorable cash flow performance in the third quarter where we realized $27 million of cash flow from operating activities higher than the prior year. Please turn to slide 19.

Well, as you can imagine, as the company’s CFO I enjoy this slide quite a bit. We began increasing our attention to cash flow in fiscal 2007, measuring it weekly, identifying the cash flow levers in our control and training the organization to better manage each of the elements of working capital. We continue to have opportunity for improvement but I want to recognize the considerable progress made by our associates to date and thank them for their contributions.

Our strong cash flow performance is also reflected on slide 20, which provides an update of our capital structure. During the third quarter, we redeemed $70 million of our senior notes that matured on May 1st, so we now have $30 million remaining due in 2010. We also ended the quarter with $92 million of cash. This cash, in conjunction with future cash flows and our potential borrowing capabilities, are expected to provide ample resources to support both operating and strategic requirements.

I should note that we continue to expect annual capital expenditures of $20 million to $25 million in 2008, which implies significant spending in our fourth quarter.

At this point, I will turn the call back over to Pete.

Peter C. Wallace

Thank you, Chris. Operator, we’re now ready to entertain questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Kevin Maczka from BB&T Capital.

Kevin Maczka - BB&T Capital Markets

Gentlemen, good morning. The first question I have is related to the mix. If I remember right from last quarter, I thought we were going to be looking at more of a negative or neutral mix impact in fluid management in the back half and it looks like it was a benefit this quarter, so can you just tell me if anything changed there or kind of give a little more color on how much of an impact mix can have on that group?

Peter C. Wallace

I’ll start in and Chris can certainly follow-up. I’d say it was better than what we had forecasted at the last quarter. We had more sales from our energy segment and in particular, some particular products that have higher margin than the balance. We are very heavily involved in the drilling activities. Some of our drilling related products are more profitable than our down hole products, and we saw an increase in some of those activities.

Some of these tend to be a bit of an in for out, so we can’t always tell exactly what we are going to see throughout the quarter, and I’d say that’s the upside that we had.

We had also planned on seeing more growth coming in from our fluid management part of the business related to the industrial pumps, in particular the Moyno industrial pumps, as we took care of our ERP implementation and got that behind us. We saw an increase in there but I’d say that the energy sales just overtook that and gave us the profitable mix there.

Chris.

Christopher M. Hix

No, I think that’s fair, Pete. The growth in the quarter was strong. We did get some nice flow-through from that and as you indicated, we continue to see strength in the energy side of the business.

Kevin Maczka - BB&T Capital Markets

Okay, and just switching gears, you’ve been talking about this sales training and key account management for a couple of quarters now and I’m just wondering -- are you able to point to a specific benefit of that in this quarter, or was the strength in orders and backlog and revenues in this quarter just more of a function of the strong end markets and geography that you are in?

Peter C. Wallace

Well, I can safely say that we have won new business as a result of the key account management programs that were implemented earlier in this fiscal year, so I would say that we truly are taking share of wallet, if you will, from some of the targeted accounts and that certainly helps us as we go forward.

Kevin Maczka - BB&T Capital Markets

Okay, and if I could just ask one more and then I’ll jump back in line; in terms of your capacity, I think you talked about bringing on a little bit more in the fourth quarter and again in ’09. How do you view your footprint right now in terms of capacity? Is it possible that your overall footprint can continue to decline from here?

Peter C. Wallace

I don’t know if the question, Kevin, is specifically related to fluid management or across all of the business. Can you clarify?

Kevin Maczka - BB&T Capital Markets

Well, both, really.

Peter C. Wallace

If we were to take a look at fluid management, I think what you will see is that we are going to be making some investments in some of our existing sites to ramp up our capacity, just to take care of the need that we are now forecasting for the balance of this year and the foreseeable future going out beyond that. At some point in time, we would like to expand our capabilities and manufacturing presence in some of the international markets and in particular in Asia. We are really not doing all that much in the way of production in Asia at this point. There are big opportunities there and we will want to have more of a local presence at some point in time. Presumably, we’ll find ways to leverage off of our existing operations. As you know, we’ve got two joint ventures in China at this point in time. Ideally, we’ll find ways to leverage off of that or find some other convenient locations that we can properly service our customers in the more remote regions.

If we were to take a look at the balance of the organization and in particular process solutions, there may be opportunities to continue sharing and collapsing some of our sites. At this point in time, we are really focused on implementing lean. We are not focused on taking down any locations. We’d like to do it more on a virtual capacity at this point in time, using ERP systems and other communications to allow us to share information and get some greater efficiency across the group on that matter.

And within Romaco, during this fiscal year, sort of quietly behind the scenes, we did do one further consolidation where we took two business sites in our processing solutions part of Romaco and collapsed that into virtually one site, and pretty much wrapped that up during this last quarter, so we’ve made some good progress there as well.

Kevin Maczka - BB&T Capital Markets

Okay. Thanks for the time and congratulations.

Operator

And the next question comes from the line of Mike Schneider from Robert W. Baird.

Mike Schneider - Robert W. Baird

Good morning, Pete. Good morning, Chris. Pete, maybe you can start with the fluid management group. You indicated again that you would expect the mix to go against you in Q4, and to the previous question, I guess, what do you see coming? Is it more industrial pumps again as part of the mix, or is there something about the mix in the backlog that you see coming?

Peter C. Wallace

You see a little bit more from industrial pumps. That’s an accurate statement. Throughout this last quarter, we tended to ramp up as the quarter progressed and what you should see in this final quarter is pretty strong shipments for each one of the months in the quarter for the industrial side of the business. So just by definition there, you should see a little bit of a mixed shift towards industrial versus energy.

And we really got fortunate this last quarter with the mix that we had within our energy offering and just based on historical patterns and things of that sort, we don’t think we are going to be quite as lucky, if you will, as we get into this fourth quarter.

Mike Schneider - Robert W. Baird

Okay, and then as far as orders go in fluid being up 12%, can you give us some indication as to what you’ve seen as far as a reacceleration in the drilling activity? Or indeed are the orders accelerating in industrial as well?

Peter C. Wallace

I’d say you were seeing more of an impact from the energy side of the business and it’s more across the board. As you know, we are very active in the U.S. We’ve tended to be more oil than gas and yet we are seeing some strengthening in some of these oil related activity -- I mean, in the gas related activities. You know, Canada tends to go through their break-up season where they have to take the vehicles off the roads as they go through the transition from winter to summer. All that starts to get you behind. You’ve got the gas prices supporting further activities and we are starting to see some firming in that part of the business, which adds to our strength.

In addition to that, we continue to be very active in the international markets. In spite of the issue that we had in Kazakhstan that we referred to in the last quarterly update, we continue to make progress in Australia, we’ve got a lot of work underway in Argentina, we continue to do fairly well in Venezuela. So we tend to have a lot of things going in the right direction for us across the group.

Mike Schneider - Robert W. Baird

And the order growth at 12%, or the organic growth this quarter, can you give us some sense as to how much price is contributing?

Peter C. Wallace

Well, price is included in all of our business units and that’s a good point to bring up, just for everybody. We are certainly seeing a fairly high inflationary cost in particular on some of the steel products that we are sourcing and some of the other commodities, such as energy, would also impact some of our operations, like the process solutions business.

Our group is really actively managing it in full support of Chris Hix and the finance team, just making sure that we really understand the inflationary costs, be it wage inflation, material inflation, or things of that sort and really doing a tough check to make sure that we are covering that with selling price increases in the marketplace.

When we take a look at the energy side of the business, we are fortunate because people understand what’s going on and we are able to generally pass along our cost increases through to the market in the way of price increases. So we’ve done a good job there. We’ve really not fallen behind the eight ball on that part of the business.

Mike Schneider - Robert W. Baird

And just specifically, so the 12% order growth in fluid, is that half or more due to price at this point, or am I overstating it?

Peter C. Wallace

I’d say yeah, you’re probably not far off. I’d say that on a year-over-year basis, you are probably looking at 4% to 5% in the way of price, which is very healthy for an industrial manufacturer but that’s reality in that part of the business.

Mike Schneider - Robert W. Baird

Okay, and then just a last one on the process group; so we’ve talked for many quarters just about how lumpy that business is, but you’ve got me intrigued about the comment that project activity at least looks like it’s slower in Asia. Is that a global phenomenon? And maybe just some more color on it, Pete, because again your comments are -- I guess you are unique this quarter in that regard.

Peter C. Wallace

It’s something that we track. I mean, we’ve been surprised, quite honestly, with the order rate that really jumped up for the last 12 months throughout the area. We’ve won a lot of very large projects that are destined to go and ship into China specifically. A lot of these have been booked in both Europe and U.S. locations for the process solutions group.

As we take a look at the inquiry activity, we generally have a fair amount of projects underway throughout the course of the year, but I’m detecting from our management team there’s just a little bit lower level. Nothing that’s causing us to panic but something that we’re certainly monitoring. Everything that we see in China continues to be very strong, albeit for some of the -- the reduction that we’ve seen in some of the inquiries coming in just recently.

So it’s nothing that I’m panicking. This stuff can move around pretty quick. As you know, we’ll book many times projects that will be $5 million to $10 million, so these things can come and turn on a moment’s notice. But it’s something that would just get our antenna up as we go into the future months here.

Mike Schneider - Robert W. Baird

Okay. Thanks and congratulations, guys.

Operator

And the next question comes from the line of John Franzreb from Sidoti.

John Franzreb - Sidoti & Company

Good morning, guys. I want to actually follow-up on that last point, because you kind of also mentioned that you were having some pricing pressures in Europe, a weak outlook in Asia and you also mentioned about higher costs, Peter, and costs of solutions. Should we be tempering our expectations in that business, maybe as we exit the fiscal year?

Peter C. Wallace

I think it’s probably premature to be tempering the expectations, certainly for the balance of this year. Again our backlog is up so significantly -- I mean, lest we forget, orders are up 20% year-to-date on a year-over-year basis, so we’ve got a lot of backlog and we’ve done a much better job implementing a lot of our disciplines around pricing projects and things of that sort. So we should continue to see the process solutions group continue to ramp up certainly throughout the course of this year.

I think it’s just one of those things, just to be fair, I’m just trying to put things out that we can see so far in certain businesses. In the chemical space, generally we can see out six to 12 months. That’s generally what we were operating with right now. We feel pretty good with that time horizon. Beyond that, our crystal ball gets a little less clear. Again, I’m not trying to over-signal on anything. I’m just stating some of the realities that we are experiencing in some of the business.

John Franzreb - Sidoti & Company

And is the bias still chemical versus pharma?

Peter C. Wallace

What was that, John?

John Franzreb - Sidoti & Company

Is the bias on the order book still chemical versus pharma?

Peter C. Wallace

Yes, it continues to be very much a chemical related recovery that we’ve seen. Investments in pharma for the -- that hit the process solutions group have been okay but the real run-up that we’ve seen over the course of the last 12 months on the order and sales activity have been much more directed towards the fine chemicals. And just speaking along those lines as we take a look at the Romaco end of the business, we are seeing strength coming through in the packaging part of the business, so Romaco's prospects look actually pretty good as we go forward.

John Franzreb - Sidoti & Company

Great, and just switching to the fluid management business, can you talk a little bit about the international successes that you referenced during your comments earlier?

Peter C. Wallace

I’d rather not get too specific, just for competitive reasons, but I can give you some of the regional activities that we have done. In Australia, we have a major customer that we’ve worked with. They’ve been operating in some of the oilfields and they’ve undertaken other investment initiatives to get into coal bed methane, which allows us to set up and really leverage off our existing relationship that we’ve had over the course of the last couple of years as we help them implement their new activities.

When we get into Argentina, we are very busy with a lot of quotation activity for major projects. We’re sensing that some of our customers will want to go ahead and redistribute some of the business that formerly went to some of our competitors and we think we’ll end up benefiting from some of that as we go into the future months.

And then Venezuela, while it’s been a very difficult situation for a lot of the big oil companies, we continue to have a fairly good presence in Venezuela and the remaining customers rely on us more and more for our application expertise to keep them profitable.

John Franzreb - Sidoti & Company

Excellent, thanks. One last question, given the improved balance sheet, and I realize you are looking at adding capacity, are you actually looking at acquisitions or is really your efforts going to be focused on the continuing cost savings and rationalization programs and improving internally the firm versus looking external?

Peter C. Wallace

We are actually looking at both. Throughout the last one to two quarters, we probably reviewed about 25 or 30 different business opportunities out there via acquisition, signed confidentiality agreements on a number of units. We placed letters of indicated interest with valuations but we have not gotten to anything that really crosses into our zone, if you will. Pricing has remained too high for our comfort levels, so we are looking at acquisitions more aggressively. We’ve brought on board a vice president of business development from the last quarter, so we are wrapping up that activity but again, we expect to be every disciplined with our approach to make sure that we truly create value instead of destroy value as we go forward.

John Franzreb - Sidoti & Company

Would it be fair to assume there will be a fluid management bias?

Peter C. Wallace

That’s safe to assume that, yes.

John Franzreb - Sidoti & Company

Okay, great. Thank you very much.

Operator

And the next question comes from the line of Ned Armstrong from FBR Capital Markets.

Ned Armstrong - FBR Capital Markets

Thank you. Good morning, guys. In your presentation, you noted in your industrial pump business that you were getting solid contributions from both the chemical and water waste water markets. And I was wondering if you saw this activity in each of the sub-sectors accelerate, decelerate, or remain steady throughout the quarter.

Peter C. Wallace

I would say that we probably saw a little bit of an improvement. Quite honestly, as we went through the ERP installation earlier in the year, our lead times were extending out and I think we probably did ourselves a disservice there for a short period of time. And as people understand that our shipments are now coming through, we are back on schedule, I think people are more confident in place some of the business with us. So I’d say that might be the one single different that we might have seen one quarter into the other quarter. And again, the markets continue to be healthy. We’re not seeing them running away from us but they are very healthy.

Ned Armstrong - FBR Capital Markets

Certainly you’re not seeing deterioration then?

Peter C. Wallace

We have not.

Ned Armstrong - FBR Capital Markets

Okay. That’s good. Thank you.

Operator

(Operator Instructions) And the next question comes from the line of Jeff Hammond from KeyBanc.

Jeff Hammond - KeyBanc Capital Markets

Good morning, guys. Just to go back to your comment on pricing pressure in Europe, can you just speak to what you are seeing in Europe in general? And then to the issue of price pressure, how are you managing that versus the input cost increase?

Peter C. Wallace

First off, on the price pressures, this is really just a change in some of the competitor dynamics. I’d say that some competitors are coming out and they are trying to fill up their shops, maybe not always with profitable business but that happens in some of the industrial markets at points in time. That’s what we are seeing, some of our competitors making more investments in trying to bring on business.

We’ve been doing quite the opposite. We’ve been trying to take out excess capacity to improve the total business, so those are some of the dynamics that put price pressure on there.

Jeff Hammond - KeyBanc Capital Markets

But it’s not really a function that demand is softening there, so --

Peter C. Wallace

Actually, demand’s been up there. We’ve walked away from some projects simply because it doesn’t meet our expectations for the value that we deliver, so some of the things that you will see, even with the high quarter rates that we’ve had throughout the course of the year, that’s in spite of the fact that we walked away from many, many jobs. So markets continue to be fairly strong, competition’s winning some, we’re winning some and all of that. Competition just tends to be a little bit more aggressive on how far or how low they will go to take some of these jobs, and we are trying to be very disciplined. I think we are trying to work the magic where people understand what they get from us -- the warranty, the support, the application expertise, and all of that and sometimes you lose an order here and there only to find that the customers come back even stronger when they realize what they had with us as a supplier.

As far as managing cost and price, we are disciplined about this. I mean, we take a look at all of the inflationary components. We add them up. We take a look at our pricing. We either go out with price increases or in some of our business units, we’ll have the opportunity to tag along some surcharges as we will pick up from some of our suppliers. But we go ahead and manage that and Chris Hix and the team on a regular monthly basis, they’ll go through and determine hey, are we staying ahead of it or not?

So we’ve done that. We’ve taken away some of the discounting authority that might have gone all the way down to our sales people or sales managers and really holding this at very high levels within the respected business units. So if somebody wants to have a deviation on the price, they go to pretty high levels before they get it and I think that’s just forcing the discipline to take place.

Jeff Hammond - KeyBanc Capital Markets

Okay. And then just over to process, I mean, you mentioned certainly the very healthy backlog. Do you feel like you have any bottlenecks within your system that’s holding back shipment timing or is it just a function of you’ve had these large projects come in and it’s just a matter of timing of when those ship?

Peter C. Wallace

You bring up a good point. Throughout the year, we’ve had a couple of bottlenecks. One would be in our industrial mixers, where the business has just gone up tremendously. I mean, we are up over 50% in the last couple of years and with that, while we love it, it brings its own challenges. That’s an area that we are spending a lot of time really trying to lean up the operation, going from an organization that had a convoluted process throughout the operation to one where we are really putting in the single piece flow, where we can bring in raw material and really have it flow throughout the organization, drastically reducing the lead times and improving efficiency.

We are making progress there. We are not completely out of the woods but I think we are making good progress there and we should continue to see some impact coming through in this final quarter, in particular in the mixer side of the business.

Earlier in the year, we had some issues with some furnaces where we had to take for the reactor side of the business, where we had to take some production from Germany, shift it over to our U.K. operation for final assembly, so those by their very nature come up with some bottleneck issues.

I think we are in good shape within reactor systems. I think we are improving throughout Chemineer, so that we should continue to get better.

If we had an operation that was flowing a little bit better of mixers, I think we could’ve taken more business. And on the similar note as we take a look at fluid management, while we’ve always kept up with it with the strong demand that we are seeing in fluid management, I hate to say it but we could probably sell more of we had more capacity. So the capacity coming on in this fourth quarter is getting here just in the nick of time.

Jeff Hammond - KeyBanc Capital Markets

So if you get that capacity in, you might even see some acceleration in that business as you move into ’09?

Peter C. Wallace

Well, we’ll have a better ability to continue to grow the sales, that’s correct, yes.

Jeff Hammond - KeyBanc Capital Markets

Okay. Can you give us a better perspective of what your mix is within the energy business between drilling and down hole, and what it might have been versus normal this quarter?

Peter C. Wallace

I don’t have the granular details on that, Jeff.

Jeff Hammond - KeyBanc Capital Markets

Okay, maybe we can -- we can follow-up offline there. Okay, thanks, guys.

Operator

And the next question comes from the line of Alan Mitrani from Sylvan Lake Asset Management.

Alan Mitrani - Sylvan Lake Asset Management

Thank you. Can you tell us what CapEx was this quarter, and also what cash flow from operations was?

Christopher M. Hix

Yeah, the cash flow from operating activities was about $27 million and the CapEx for the quarter I think was about $4 million. I can get you a harder number there but that’s in the ballpark.

Alan Mitrani - Sylvan Lake Asset Management

Okay, so that means -- so given your $20 million to $25 million, you are looking for -- call it your biggest quarter, somewhere around $9 million to $12 million I guess in the fourth quarter of CapEx?

Christopher M. Hix

Yeah, it will be fairly substantial but again, we’re keeping our original guidance for the full year. It’s just a question of timing, things moving from Q3 to Q4.

Alan Mitrani - Sylvan Lake Asset Management

Okay, and then can you give us a sense -- it sounds like your tone is to add CapEx. You haven’t found an acquisition yet so you are going to -- and you are bumping up on capacity. I realize you are not giving next year’s guidance in terms of earnings yet but from a cash flow perspective and CapEx, can you give us a sense of what CapEx could be next year?

Christopher M. Hix

I think we’re still scrubbing down those numbers as well, so I don’t think we want to give any early guidance on that. From a cash flow, from an operations standpoint, our focus is to try to maintain the working capital investments that you have while you grow the business so that you continue to get efficiencies. We still see opportunity to improve the DSO in the business. We ended the quarter at 66, 67 days and there’s clearly more room for opportunity. And as we grow the business and implement lean, we can get the current inventory turns of about four. We ought to be able to improve that as well, so those working capital improvements again should help us to manage the investment in working capital as we grow the business.

Peter C. Wallace

And just to follow up on that, so that we don’t get carried away with the capital spend, we’re under-spending against our original plans in both Romaco and process solutions. We are spending more in fluid management, really driven by the customer demand. And in part of the numbers that Chris just alluded to, that will include an acceleration of capital that was initially going to be put into our 2009 fiscal year. But with the demand coming through, we want to get our place in queue to make sure that we’ve got equipment coming on board. So it’s really to support those parts of the business that have really continued to see a very strong growth in the future months.

Alan Mitrani - Sylvan Lake Asset Management

Excellent. Thank you. And also, just a couple of questions on the income statement -- on your tax rate, is 35% a good number to use, or as the proportion grows from Europe and from overseas, we should be trailing that down, because it hasn’t really been 35%. It’s averaging close to that but it’s moved around a little bit.

Christopher M. Hix

I think all year we’ve been talking about sort of a mid-30s number. Tax rates can bounce around, depending on the jurisdiction where you get the income and so forth, but I think we are still comfortable with this concept of a mid-30s tax rate for 2008.

Alan Mitrani - Sylvan Lake Asset Management

Okay. And can you give us a sense of the size of the acquisitions you’ve been looking at?

Peter C. Wallace

They really range in size from something as small as $10 million in revenue to others that will be $200 million or so, so we’ve been coming out with a disciplined approach, taking a look at what we can do with the business, where we can create the value. We’ve taken a look at realistic multiples and we just refuse to get insane with what we are going to pay for a business. Some of these seem to be going for multiples higher than we are now gaining in the marketplace and we just don’t want to get into that just yet.

Alan Mitrani - Sylvan Lake Asset Management

Okay. And lastly, maybe you could talk about the recount has actually gone up over the last call it six weeks, and it seems like oil and gas is strengthening. Can you give us a sense of what you saw in the first month of this next quarter? And obviously the rig count going up and people renewing rigs for higher prices, I have to imagine that speaks to higher prices for the part suppliers as well. Just give us your thoughts on that.

Peter C. Wallace

I won’t speak necessarily to the first month of this quarter, but I’ll just say generally what does it mean for us? Certainly those that have followed us in the past will understand that rig count and our sales have a direct correlation, so that will help us. More importantly is the type of drilling activity that takes place. We are very big into the horizontal and directional drilling, which really speaks well to a lot of our products, and that activity has been ramping up. So I think that’s where we are starting to see more and more of a boost.

Alan Mitrani - Sylvan Lake Asset Management

And in terms of price increases?

Peter C. Wallace

Price increases, we are one that really stays ahead of the price inflation but we are not out there necessarily gouging our customers, so we really want to stay in that same mode. Ideally, we are going to continue to implement lean initiatives and other cost reduction efforts will continue to help us maintain those high levels of profitability, but we are not necessarily trying to improve our operating profit by just getting out there and gouging at this point in time.

Alan Mitrani - Sylvan Lake Asset Management

Thank you.

Operator

The last question comes from the line of John Franzreb from Sidoti.

John Franzreb - Sidoti & Company

You mentioned that your focus is really going to be on lean versus facility rationalization efforts -- could you just give us a --

Peter C. Wallace

Hello? John, are you there?

Operator

I think his line dropped. If he could press star, one again, please. Thank you. You may proceed, sir.

John Franzreb - Sidoti & Company

You mentioned before that your focus was really going to be on lean. What I’m wondering is what if any major cost saving initiatives remain in place. You said you were really not apt to be closing facilities right now. Can you just kind of walk us through what’s on the table right now?

Peter C. Wallace

I think the biggest benefit will be the adoption of lean. Barring any major facility closures and things of that sort, just the continuous improvement in everything you do. It’s the functional disciplines, it’s the pricing management, better ability to negotiate, selling the value that we have. It will be stripping out all of the inefficiencies that we have in our operations, getting on-time delivery up. In many ways, I think that the on-time delivery and the reduction in lead time will be as much of a marketing tool as anything else that we could put out in place. We’ve had some of the value stream maps that we’ve done at similar facilities where we could take out a half of our lead time. If we can do that, that’s worth market share and market share drives the sales, incremental sales with our drop-through profitability and our operating leverage will produce a lot or results for us. So I think that’s really the focus that we’re on at this point in time.

John Franzreb - Sidoti & Company

Great. Thanks a lot, Peter.

Peter C. Wallace

At this time, we don’t have any further questions in the queue. I will turn this call over to Mr. Peter Wallace for closing remarks.

Peter C. Wallace

Very good. Thank you and thank everyone for all your interest in Robbins & Myers. We look forward to providing a report on our fourth quarter performance and fiscal 2009 outlook during our October update. Thank you and goodbye.

Operator

Thank you, ladies and gentlemen. This concludes the presentation. You may now disconnect.

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